"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Friday, October 31, 2014

I have been detailing this ratio chart quick often of late as I am of the opinion that the gold shares still lead the price of the metal. My concern for the outright price of gold has been noted as this plunging ratio has been a very good indicator for the future direction of the gold price thus far.Much is made by the same culprits as usual about big sell orders on the Comex, takedown of this, takedown of that, the usual, blah, blah and more blah, as an attempt to buttress the notion that this fall in the price of gold has been orchestrated by the powers that be to discredit the metal.The problem with this theory in this environment is that the MINING SHARES have been LEADING the metal lower. Gold is merely following what the miners have been very effectively signaling now for some time since this ratio began declining.I cannot tell you how disconcerting it is to read the same discredited individuals ( who will not do us all a favor and simply go away) pedaling yet another "special insider claim" that they are privy to the origin of the sellers that "have hit gold with big sell orders eating through all the bids". What else is to be expected when large speculators are entering a market on the sell side or bailing out from off the long side, as their positions grow increasingly underwater? Tiny offers? Small lot sell orders? That is not the nature of today's computer-driven markets and anyone who trades for a living knows this quite well. Those who continually attempt to make some sort of big deal about big sell orders as IF they are coming from the powers that be are nothing but pompous windbags spouting hot air that deludes only the unsuspecting and naïve. Also, are we to assume that some nefarious evil agent has been working over the share of each and every mining company PRIOR to then going in and "taking down the gold price"? If the mining shares lead the way down in gold, then to be consistent with the latest gold perma-bull spin, someone would, by necessity, have had to first orchestrate a takedown of the mining companies that comprise all of the gold stock indices, not to mention have been selling all of that gold that has been withdrawn from GLD.Here is the simple truth - the Dollar has been surging against its competitors; Central Banks have signaled their intention to either keep interest rates low or to provide stimulus or both; and commodity prices in general are falling. In that environment, one in which inflation is not a concern, stocks remain the GO TO asset class. Until that changes, gold is not going to attract sufficient capital flows from serious money managers and hedge funds to keep it levitated. Since the path of least resistance in the metal is therefore lower, that is exactly where it is going. There is no mystery whatsoever to any of this nor is there any conspiracy to force the price lower. Specs simply are not interested in an asset that pays no yield and which requires an overall economic environment in which its price is more likely to head higher. Along this line, take a look at the HUI/Gold ratio chart once again. the only reason I note it once more is because something historic occurred with it today; it hit the lowest recorded level in the history of the HUI.

Again, this is HISTORIC. As such it signals either more losses lie ahead for gold or an abrupt turnaround for the mining shares. Since both the HUI and especially the GDXJ closed near their weekly lows, that does not look too likely at the moment.In closing, let me say this... gold's downside breach of $1180 has as much technical significance as its breach of major chart support near the $1530-$1525 level in April of 2013. That too was a TRIPLE BOTTOM that failed.

Note that gold spent 18-19 months moving sideways in a broad range between roughly $1800 on the top and $1530-$1525 on the bottom. When it broke down below that range at the TRIPLE BOTTOM it proceeded to fall another $345 before bottoming out and forming the base of a new 16-17 month long sideways trade above what proved to be another TRIPLE BOTTOM at $1180 that failed today.The question now becomes will gold do what the pattern calls for, namely eventually leg down somewhere between $300 and $345 before bottoming and carving out yet another base? That could put the metal down as far as $835 - $880 before reaching a new bottom once more. Of course that seems inconceivable to many but back when gold was trading in the range between $1800 and $1525, it seemed inconceivable at that time that it could ever fall as low as below the $1200 level!Please note that this is not a prediction; it is merely an observation based upon an analysis of former price action which extrapolates POTENTIAL. Much of course depends on the overall direction of the US economy and whether or not Central Bank activity proves to be insufficient to deal with the deflationary headwinds buffeting it. One thing that inclines me to not rule out a move this low is that HUI to Gold ratio charted and commented upon above. That is so far off the mean that some sort of reversion seems as if it is necessary to correct it and bring it back more within the norm. As stated before, it can do so either by the mining shares gaining on the price of gold or the price of gold falling faster than the overall price of the shares.One last look at the LONG TERM CHART shows some Fibonacci retracement levels sketched in to provide some shorter term targets if the selling intensifies.

The downside is now open first to near the $1150 level. Failure there targets that $1100-$1090 level.....

If you want to get some sort of idea how the big sharks eat the little fish alive, take a gander at the following Commitments of Traders chart for the silver market.Here is the chart:

I dropped out both the Swap Dealer Category and the Other Large Reportables Category for the sake of keeping the chart cleaner and more readable.The Blue line is the NET POSITION of the hedge funds. The Red line is the net position of the Small Spec or the General Public. The other line is the Commercial category.What have the hedge funds been doing in silver for the last few months? Answer - liquidating longs and adding shorts. In other words, they have been SELLING. What has the general public or the minnows been doing since then. Well, some longs have liquidated so there has been some selling but look at their position. They are still net long in the silver market!What has silver done since the peak in July on this chart? Answer - it has collapsed in price from near $21.50 to today's low near $15.50. That is nearly a 30% LOSS in 4 month's time.

I cannot count the number of emails that hit my inbox from the gold cult members yapping about HIGH OPEN INTEREST in silver as if somehow that is yet one more reason to be long the precious metals. When pointing out to them that the interest is both from increasing numbers of spreads, and from speculators interested in SELLING THE METAL, I am usually greeted with derision and condescending rebuttals as if somehow I am ill-equipped to understand the esoteric secrets of the strange universe that they are privileged to inhabit.Some love to argue even more throwing around such insightful comments as, "Mr. billionaire fund manager asserts with great confidence that sometime this year, silver goes north of $50" as if somehow that settles the matter.And yet, look at the chart. What does it tell you? Answer, a long silver position has butchered those who were foolish enough to think that they knew more than the market especially Mr. billionaire fund manager who is now probably Mr. millionaire fund manager.

The thing about this which is even more tragic, is the sheer size and extent of the losses that this erratic metal can inflict on the account of anyone who gets on its wrong side. A $1.00 move in silver is $5,000 per single contract. Do the math and you get the idea how much money the hedge funds took out of the pockets of the inept general public who continue to listen to the siren-songs of those self-proclaimed market experts who keep pushing them to buy it in spite of the obvious.Now, this late session bounce in silver is interesting as it indicates some decent buying came in late, very late, in the session but in looking over at the mining share indices, they stink, having barely managing any sort of significant closing bounce heading into the weekend. That today was also the end of the month, a day on which one can expect to see a great many big price swings and a day on which some funds tend to realize some paper gains for the sake of their monthly statements, and the fact that those mining indices closed so poorly, one has to be skeptical that the bounce higher in this metal signifies the end of the downtrend. It could very well just sit down here for a while and move sideways while it consolidates its severe losses from this week. I will be watching closely next week to see what kind of follow through to the upside, if any, we might get. The ability to push back above $16.00 is constructive but we will know whether or not it has any staying power early next week. Until then, the general public remains LONG and WRONG and is serving as fodder for the hedge fund bears who are mercilessly goring them to no end. A lot of would-be trading careers from the small public were ended this week by the devastation suffered at the hands of this most fickle of metals.

The greenback, as illustrated by the USDX, has managed to poke through the chart resistance level at 87 in today's session. The overnight, surprise action by the Bank of Japan, has given currency traders a strong reason to hammer the Yen lower and they are doing exactly that.The Euro is holding a bit better and is only down some .7% compared to the 2.5+% beating that the yen is taking, but both majors are down against the Dollar and that has enabled the greenback to finally better that tough chart level noted.

Essentially what we have is a currency, that was trading in a very broad range for the last two years that broke out of that range to the upside in September. The reason for the breakout was simple - investors and traders are convinced that is any of the Western industrialized nations ( and I am including Japan in this group ) was going to move higher on the interest rate front, it would be the US. This is in spite of the clear statements by the Fed that they intend to keep interest rates low for a "considerable time".The issue however is very clear - the ECB and the Bank of Japan were NOT going to move higher on rates. Neither was Canada or Australia, not with the price of commodities moving lower. In effect, the Dollar wins by default when it comes to the currency of choice for investors and traders in such an environment.After the upside breakout on the chart, the Dollar has spent the last month consolidating its gains building a base from which to launch the next move higher. That appears to have finally taken place today with the BOJ move the catalyst.At this point, a weekly CLOSE above 87, sets up a likely run at 89. As long as the Dollar is exhibiting such strength, gold has little chance of halting its slide lower.I can add another comment to this... grain traders who are oblivious to these movements in the critical currency markets and are happily chasing grain and bean prices higher, are going to experience a lesson in global markets very soon that they will not forget.With crusher margins at levels not seen in two months, and at levels which by any historical standard of comparison, are incredibly profitable, they will crush as many beans as they can get their hands upon and do it as fast as they possibly can. At some point, the supposed meal shortage is going to become a meal glut.

We have been chronicling with some detail the regular weekly Commitment of Traders reports for some time in many of the markets that I choose to comment upon. In those comments, I have noted the positioning of some the LARGE speculative forces as being on the LONG SIDE of gold.Here is a graphic of the condition ( or better - what WAS the condition ) of all those SPECULATIVE longs in the market.Note the HUGE NUMBER: It currently stands at 241,792 if you include option positioning.

By the way, just for comparison's sake, the total number of SPECULATIVE SHORTS in the gold market is a trifling 134,381. As you can see, speculators have continued to be stubbornly long in the gold market despite the deteriorating chart pattern and despite the deteriorating fundamentals for gold. By the latter, I am speaking primarily of the surging US Dollar and the fact that commodity prices in general are falling right along with the TIPS spread which is indicating the sentiment that inflation is of no concern at this moment.Here is the point in all this... an examination of the chart shows that approximately 55,000 of those new long positions put on in gold near the $1200 are all completely underwater. That is where this selling is coming from. Once the TRIPLE BOTTOM at $1180 failed ( remember the old trading adage that, "TRIPLE BOTTOMS RARELY HOLD" ), the sell stops were activated and out they came. Bears have been licking their chops to get to those for some time now. Today, they got them. With that level being the last line of defense in the sand for the gold bulls, speculative forces are going to be aggressive in going after gold from the short side now, just like they had begun doing in the silver market for some time. The carnage might just be getting started.Interestingly enough, at the moment I am typing these comments, gold is down 2.96% compared to the HUI being down 5.42%. Guess what - that HUI-gold ratio that I have been charting, noting that it has reached levels last seen 14 years ago in the year 2000, is still falling lower. Gold is therefore either going to continue to move lower or the HUI Is going to have to move higher. Gold is overvalued, even after its fall today, compared to the mining universe.Either that, or as I said yesterday, many mining companies are finished.

If you have benefitted from some of the articles posted here and would like to express your gratitude to Trader Dan for freely sharing some of the market wisdom he has gained over his long trading career, please feel free to Donate.

About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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